Patterns of trade and the gains from trade: insights from classical theory

Nations (or firms in different nations) trade with each other because they benefit from it. Other motives may be involved, of course, but the basic motivation for international trade is that of the benefit, or gain, to the participants. The gain from international trade, like the gain from all trade, arises because specialization enables resources to be allocated to their most productive uses in each trading nation. Everyone recognizes that it would be foolish for a town or a province to try to be self-sufficient, but we often fail to recognize that the benefits of specialization and the division of labor also exist in international trade. The political boundaries that divide geographic areas into nations do not change the fundamental nature of trade, nor do they remove the benefits it confers on the trading partners. Our goal in this chapter is to establish and illustrate this basic truth, which was developed by the classical economists of the late eighteenth and nineteenth centuries.